AGRICULTURAL RISK MANAGEMENT STRATEGIES NEEDED BY FARMERS FOR SUSTAINABLE CROP PRODUCTION
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Agriculture makes use of the land to raise plants and animals. It is the basic source of food for human sustenance on the planet earth. Agriculture is the production of food, feed, fibre and other items by the methodical cultivation and harvesting of plants and animals. Agriculture is often considered as the complete range of technologies related with the production of usable products from plants and animals, including soil cultivation, crop and livestock management and the activities of processing and marketing, (Sci-Tech Encyclopedia, 2009). Agriculture uses the land to raise plants and animals. It is the primary source of nourishment for humans on Earth. Agriculture is the systematic cultivation and harvesting of plants and animals to provide food, feed, fiber, and other products. Agriculture is sometimes defined as the full set of technologies related with the production of usable products from plants and animals, such as soil cultivation, crop and livestock management, and processing and marketing operations (Sci-Tech Encyclopedia 2009).
Agricultural sector has been regarded as the mainstay of the Nigerian economy since 1970’s, with high potential for foreign exchange earnings. This sector is very important in the third world countries, especially Nigeria. This is because it provides food, employment and export earnings for the economy. According to Oyejide (2008), agriculture is the sector accounting for the dominant share of gross domestic product (GDP), employment, export earnings and food supply, carries a great deal of the economic burden and contains much of the potential of many economies. Oji-Okoro (2011) stated that the agricultural sector is the largest sector in the Nigerian economy with its dominant share of the GDP, employment of more than 70% of the active labour force and the generation of about 88% of non-oil foreign exchange earnings. Its share of the GDP increased from an annual average of 38% from 1992 to 1996 to 40% from 1997-2001 compared to crude oil; and GDP declined from an annual average of 13% in 1992-1996 to 12% from 1997-2001 (Oyejide, 2008). Agricultural sector is believed to be critical for both overall economic growth and the reduction of poverty in any society.
In the face of all these basic importance of agriculture, agriculture seems to be a risky enterprise particularly in developing countries (Hardakeret al in Akcaoz&Ozkan, 2005). This is because its activities in developing countries like Nigeria and particularly in Enugu State are subjected to a wide range of risks because of the variable economic and biophysical environment in which farming operates. The impacts are heightened by ‘time’ since this plays an important role in the production of agricultural goods; long time lags are dictated by the biological processes that underlie crop and livestock production (Moschini& Hennessy in Ullah, Ganesh, Farhad and Muhammad, 2016). Therefore, given the importance of the agricultural sector in supporting economic development and as a major source of livelihood for rural population in developing countries, it is pertinent to state that there are so many risks involved in agriculture which its impacts have greatly impeded the efforts of farmers in terms of agricultural production and productivity. This is due to the fact that agricultural activities entail extensive, direct and continuous contact with the forces of nature and in this part of the world where scientific methods are less developed; predicting nature can be less accurate thus, making the primary role of agriculture as the supplier of food and raw materials to the agro-industrial processing and manufacturing sector very risky.
Risk in agriculture is an uncertainty (that is imperfect knowledge or predictability) because of randomness. It is seen by Organization for Economic, Cooperation and Development
(OECD, 2000) as the probability of losses resulting from incomplete control over the processes with which farmers are concerned. Risk in agriculture can be seen as the uncertainty that agricultural production will yield expected output or not. Agricultural activities are more susceptible to the physical and natural uncertainties than other enterprises and are obviously exposed to greater risk, because many of the factors that affect the decisions that farmers make cannot be predicted with 100 percent accuracy: weather conditions change; prices at the time of harvest could drop; hired labour may not be available at peak times; machinery and equipment could break down when most needed; draught animals might die; and government policy can change overnight (Khan, 2013). However, risks in agriculture are usually connected with negative effect. Little wonder and Parshad (2007) stated that agricultural risks is associated with negative outcomes that stem from imperfectly predictable biological, climatic, and price variables. These variables include natural adversities (for example, pests and diseases) and climatic factors not within the control of the farmers. They also include adverse changes in both input and output prices. Risk in agriculture can be said to be anything that threatens the farm activities. It also can be seen to be something that affect the economic return from agriculture, the livelihood of farmers, and in the long run, the capacity of farmers to invest and innovate (OECD, 2011).
The amount of risks involved in agriculture is believed to be greater than risks involved in any other sectors (Jain &Parshad, 2007). This is so because agricultural operation depends solely on the elements of weather and climates on which farmers have little or no control. Once tillage and planting are completed, farmers are faced with risks of weather and climate in order to get a bumper harvest. Also, risks manifestations in the form of variation in fertility of soils, excessive or low rainfall, outbreak of pests and diseases and market forces tend to threaten farmers.
Farmers are also faced with the risks of injury and health hazards in the course of preparing their land or raising their animals. Much drudgery associated with farming poses some health and safety problems to the farmers. They are prone to injury and accidents from their tools and implements as well as wild animals. High interest rates from lenders also put the farmer at the risk of not realizing capital and profit after production if the production was a loan. After postharvest, agricultural products are taken to the market and the surplus and scarcity of the products in the market determines what the farmers will realize as profit from all the work done. Also, constant changes in technology and innovation expose the farmer to the risk of having poor yield. These and many more are the various risks in agriculture that farmers face.
The complexities of various sources of risk can be grouped into social, market, political, financial, production and foreign exchange risk, (Njavrom, 2009; NIPC, 2006; CN, 2008; Dercon, 2002 &Mikhaylova, 2005). Social risks are the kind of risks or hazards that have their origin from man. These risks could be due to fire outbreak, burglary or theft, kidnapping of investors/workers for ransom, embezzlement, strike, civil commotion and changes in social structure e.g. divorce and dissolution of partnership which can lead to unexpected decline in efficient operation of farm enterprise. Market risks include fluctuation in input and output prices.
Political risks are due to changes in government machineries, policies and regulations which affect farmer’s activities negatively. Financial risks develop from fluctuations of interest rates on borrowed capital or cash flow difficulties if there are insufficient fund to pay creditors. Foreign exchange risks are borne out of farm’s dependence on foreign currency. Production risks occur because the farm is affected by many uncontrollable events that are often related to weather, drought, physical hazard to the farm site and technological failure of the farm. Also, sources of risk in agriculture are categorized as technological risks. This risk results from the consequences of adopting new technologies for improvement of agriculture. They occur due to poor adaptability of a particular technological innovation to a particular local situation of the farmers.
Farmers transform natural resources in the form of climatic and land resources to produce crops and livestock for human consumption. These farmers transform natural resources in the form of climatic and large resources to produce crops for human consumption. During this process, they face a lot of risk hence; they are the primary risk bearers in farming.
Various sources of risks affects farmers efficient conversion of agricultural input to output (Bauer and Bushe, 2003; Aneke, 2007). They make agriculture to be more risky than any other area of production. These agricultural risks are the major setback and discouragement many people especially the youths have that scare them away from farming in Nigeria, and Enugu Statein particular. This situation has led to many of the able bodied young men and women to prefer taking up other means of livelihood (jobs) to farming as a vocation. It has made the involvement of the youths in agricultural production to surfer nationally in recent years especially in the rural areas (Russel, 2001).
This situation has resulted to many rural youths opting out of farming in search of non-existing white-collar jobs in the cities, unprecedented rural-urban migration, increase in unemployment figure, widespread crime and abandoning of farming for poor aged rural people. The larger effect of this is that more Nigerians are going hungry by today and resources that could be used to improve on our infrastructures are spent on importation of food into the country. The consequences of this according to Degroot, Hoisington, Mugo and Friesnsen in Adesanya (2011)is that lack of education and finance as well as the aged nature of the rural farmers has led to the poor state of agriculture and food production to match with the rapidly increasing population. This in-turn is responsible for the unaffordable price of food and other agricultural products in the society. Therefore, with the unavoidable risks involved in agriculture, farmers need extra risk management strategies to remain in business and be productive.
Risk management is the systematic application of management policies, procedures and practices to the tasks of identifying, analyzing, assessing, treating and monitoring risk (Hardakeret al., 2004). It can be seen as choosing among alternatives to reduce the effect of risk Harwood et al., in Agboola, Olubunmi and Elugbaju(2018). Risk management according to Patrick in Adesanya(2011) is the process of anticipating possible difficulties and planning to reduce their consequences, and not just reacting to unfavourable events after they occurred. A risk management system is composed of many different sources of risk that affect farming, different risk management strategies and tools used and available to farmers, and all government actions that affect risk in farming.
Strategy on the other hand is a plan that is intended to achieve a particular purpose. It is the process of planning something or putting a plan into operation in a skillful way (Hooijer, Kljin, Kwadijk&Pedroli, 2002). Strategy is viewed by Dauda, Akingbade and Akinlabi (2010), as a detailed plan for business to achieve success. Daudaet, al.(2010), went further to state that in acknowledging the fact that every business including agriculture is a high stake game, a poorly planned and executed strategy may not only lead to loss of money, but jobs and even bankruptcy. Therefore, for an effective competition and success in agricultural business, well planned and implementation of the strategy is necessary.
Risk management strategy therefore is a coordinated set of activities and methods that is used to direct an organization and to control the many risks that can affect its ability to achieve objectives. It is a specific action taken in a skillful way to reduce either the probability of risk or its consequences or a combination of the two (Samuel, 2005). Risk management strategy in the views of Alhawari, Karadsheh, Talet and Mansour (2012) are methods and supporting tools to identify and control risk to an acceptable level. It can also be seen as the process whereby decisions are made to accept a known or assessed risk or the implementation of action to reduce the consequences or the probability of occurrence of an adverse event (Cheng, Yip &Yeung, 2012).
Risk management strategies therefore aim to provide some protection in situations where the consequences of a decision are not known. These strategies comprise of a variety of responses, which may lower the probability of an adverse event occurring and/or reduce the adverse consequences if the event occurs. It provides a structured and coherent approach to identifying, assessing and managing risk. Due to the risky nature of farming, every farmer need risk management strategy in order to thrive in his/her business. This is because risk management application in the farm will not only reduce the risks that have been hindering farmer’s ability to produce effectively but also maximize profit.
Conversely, in trying to get protection from a possible loss, part of the potential gain may generally be given up, meaning that most responses to risk have costs associated with them, even if they are not explicit. Every farmer tries to prevent major losses, but would enjoy gaining from favourable events. The aim therefore is to manage risk most effectively without excessively incurring losses.
Farmers have always made use of various means to manage risks (World Bank, 2010). This is why it could not be assumed that farmers have no means of or measures of managing their risks because if they don’t have any means of dealing with these risks, there would be no food in the market at all. World Bank (2010) further stated that low productivity experienced by farmers is not too far from the fact that the risk management strategies they have been using could not sufficiently deal with the risks they encounter. Therefore they require new strategies in addition to the indigenous practices they have to mitigate and cope with agricultural risks for sustainable crop production.